Yet, the Qode Growth Fund managed to do just that—beating its benchmark by over 14 percentage points during the brutal Q4FY26 sell-off.
In this edition of ETMarkets PMS Talk, Rishabh Nahar, Partner and Fund Manager at Qode Advisors, decodes the strategy behind this resilience—from a disciplined focus on quality and value investing to a systematic derivatives overlay that helped limit downside risks.
He also shares insights on small-cap valuations, portfolio positioning, and why periods of market stress often present the most compelling opportunities for long-term investors. Edited Excerpts –
Q) Please take us through the performance for FY26?
A) FY26 was a tale of two halves. The first half saw elevated valuations and selective market participation, while the second half, particularly Q4, was defined by a sharp, broad-based correction. Between January and March 2026, the Nifty 50 fell 14.54%, the Nifty Smallcap 250 declined 14.36%, and the Nifty Microcap 250 dropped 16.20%. It was one of the most challenging quarters Indian equity markets have seen in recent memory, driven by escalating geopolitical tensions, fears of a broader conflict, and a sharp spike in crude oil prices.Against this backdrop, Qode Growth Fund delivered -0.20% for Q4, compared to -14.36% for its benchmark, an outperformance of over 14 percentage points in a single quarter.
On a 1-year basis, QGF returned +7.13% versus -5.40% for the Nifty Smallcap 250, and since inception, the fund has returned +10.55% against the benchmark’s +2.50%.
More importantly, the fund ranked #1 across all equity PMS strategies in India for the month of March 2026, returning +1.34% in a month where the small-cap universe fell over 10%.
The performance story of FY26 is really about what didn’t happen — the drawdown that our investors didn’t experience. That, in our view, is the real measure of a strategy’s quality.
Q) The fund follows a multi-factor approach combining quality, growth, and value — how do you balance these factors during different market cycles?A) We don’t toggle mechanically between factors based on market conditions. That would introduce timing risk that is very difficult to get right consistently. Instead, our approach is to build a portfolio that sits at the intersection of Quality and Value at all times, with Growth acting as the validation layer.
What this means in practice: we look for businesses with strong earnings growth trajectories, healthy return on equity, and reasonable balance sheets, but we only buy them when the market is pricing them at a discount to their growth rate.
Our current portfolio has a PEG of 0.64x, with 31.37% earnings growth against a forward PE of 20.09x. Compare that to large-caps, which trade at a forward PE of roughly 29.71x with TTM earnings growth of just 11.12%, a PEG of 2.67x. Investors are paying four times more per unit of earnings growth in large-caps relative to our portfolio today.
This quarter validated the approach. Our proprietary factor analysis showed that Value was the only major factor that held up during the correction, declining just 3.84% versus losses of 11 to 16% across Alpha, High Beta, Momentum, and Low Volatility factors.
Because our portfolio is built at the intersection of Quality and Value, it naturally provided a floor that pure momentum or growth-at-any-price strategies couldn’t.
The key discipline is avoiding the temptation to chase momentum when it’s running. That’s when valuations stretch, and that’s precisely when the risk of sharp drawdowns is highest.
Q) The fund’s max drawdown is significantly lower than the benchmark — what risk management frameworks helped achieve this?A) There are two distinct layers to our risk management, and both contributed meaningfully this quarter.
The first is portfolio construction. We are deliberate about owning businesses with strong earnings fundamentals, low leverage, and reasonable valuations.
This means our equity book naturally holds up better during broad sell-offs, because we are not exposed to high-multiple, high-momentum names that tend to see the sharpest de-rating during risk-off periods.
Our portfolio companies reported 17.31% YoY PAT growth in Q3 FY26, well ahead of large, mid, and small-cap peers, which reflects genuine business quality rather than price momentum.
The second layer, and the more structural differentiator, is our derivatives overlay. This is not a tactical hedge that we put on when we feel nervous. It is a systematic, rules-based hedging mechanism that sits permanently across the portfolio.
During Q4, the options overlay contributed +11.08% over one month and +17.92% over three months, directly offsetting the equity-level drawdown during the sharpest phase of the sell-off.
The combination of quality-oriented stock selection and a systematic derivatives hedge produced the asymmetric outcome we saw this quarter. Our equity book absorbed some of the broader market decline, but the hedge more than compensated.
The result was a portfolio that outperformed its benchmark by over 14 percentage points in Q4, while limiting the maximum drawdown to a fraction of what the index experienced.
Q) With only 30 holdings, how do you balance concentration risk versus alpha generation?A) Thirty holdings is a deliberate choice, not a constraint. Diversification beyond a certain point becomes diworsification. You end up owning the index at active fees, with the illusion of risk management but none of the benefits.
Our view is that meaningful alpha comes from high-conviction positions in businesses you understand deeply, not from spreading capital thinly across a hundred names.
With 30 holdings, every position has to earn its place. Each one is selected through our quantitative multi-factor model, which screens for quality of earnings, valuation attractiveness, and growth sustainability, and then stress-tested against portfolio-level concentration and correlation risk.
The concentration also has an important behavioural dimension. When you own fewer businesses, you monitor them more rigorously. Our quantitative process continuously tracks the earnings and valuation profile of each holding, and the portfolio rebalances annually to ensure we are not holding businesses where the investment thesis has weakened.
In practice, 30 well-chosen small-cap businesses across diverse sectors and end-markets provides genuine diversification of business risk, which is what ultimately matters, while retaining the concentration needed to generate meaningful alpha.
Q) What is the rationale behind maintaining roughly 89% equity exposure and 11% cash — are you positioning defensively?A) The cash component requires a bit of unpacking, because it is not cash in the traditional defensive sense. A meaningful portion of it represents profits realised from our options positions that are yet to be redeployed, alongside the standard buffer we maintain for ongoing options activity. It is working capital for the derivatives overlay, not idle capital sitting on the sidelines waiting for the market to fall further.
That said, we are not artificially stretching to be fully invested either. At current valuations, we believe the equity holdings we have are priced attractively, and we see no reason to dilute the portfolio with lower-conviction positions simply to reach a notional 100% equity target.
The more important positioning signal is in our valuation indicators. Our Valuation Spread Index currently reads 37, suggesting equities are trading at a meaningful discount to historical norms.
Our Relative Valuation Gradient has moved to 92, one of the highest readings we have observed, indicating that small and micro-cap companies are significantly undervalued relative to large-caps.
These signals tell us that the risk-reward in our current holdings is genuinely attractive, and that the environment favours staying invested with patience rather than raising cash defensively.
Q) Smallcaps have been volatile — how are you positioning the portfolio in the current market environment?A) Volatility in small-caps is not new, and it is not something we try to avoid. It is something we try to use. The Q4 correction was broad and sentiment-driven, not fundamental.
Our portfolio companies reported 17.31% YoY PAT growth in Q3 FY26, yet prices fell in line with the broader small-cap universe. That divergence between earnings delivery and market price is precisely the environment in which patient, disciplined investors build positions at attractive prices.
Our current positioning reflects that conviction. We are not rotating into large-caps or increasing cash in anticipation of further volatility. The data does not support that decision. A PEG of 0.64x on a portfolio growing earnings at over 31% is not a position you want to abandon because headlines are difficult.
What we have done is use the rebalancing process to upgrade quality within the small-cap universe. During Q4, we trimmed a position with significant US export revenue exposure, where tariff-related uncertainties made near-term earnings visibility difficult to underwrite, and redeployed that capital into a domestic-focused cybersecurity company with strong order visibility and margin quality. This is an environment that rewards selectivity within the small-cap universe, not wholesale retreat from it.
Our proprietary indicators also signal improving conditions. The Trend Navigator has begun recovering from its deeply compressed lows, and the Relative Valuation Gradient at 92 marks some of the most compelling relative entry points for smaller companies that we have seen in several years.
Q) What investment horizon should investors realistically have to benefit from this strategy?A) We are candid about this. QGF is not designed for investors with a one to two year time horizon. It is a small-cap strategy, and small-cap investing almost by definition requires the patience to sit through periods of valuation compression that bear no relationship to underlying business performance.
The current quarter is a good illustration. Our portfolio companies are growing earnings at over 31% year on year. They are not in financial distress.
Their competitive positions have not deteriorated. Yet prices fell sharply because macro fears triggered indiscriminate selling across the segment. An investor with a two-year horizon might look at that and feel uncomfortable. An investor with a five-year horizon looks at that and recognises it for what it is: an opportunity.
We recommend a minimum horizon of three to five years, and ideally longer. The valuation anomaly in small and mid-caps, where you are paying 0.64x PEG for 31% earnings growth, does not persist indefinitely, but the market’s process of correcting it can be slow and non-linear.
The investors who benefit most from this strategy are those who remain invested through the full cycle, allowing the compounding from high-quality earnings growth to assert itself as valuations normalise.
Q) What would be your key message to investors considering allocating to QGF in FY27 amid the gloom and doom seen globally?A) The best time to invest in quality small-cap businesses is precisely when it feels uncomfortable to do so, and right now, it feels uncomfortable.
Let’s look at the data objectively. Our portfolio trades at a forward PE of 20.09x against trailing earnings growth of 31.37%, a PEG of 0.64x. Large-caps are trading at a PEG of 2.67x.
Investors are currently paying four times more per unit of earnings growth for large-cap safety than for small-cap quality. That is a striking divergence, and one that history suggests does not persist over a three to five year horizon.
Our Relative Valuation Gradient, which measures the relative attractiveness of small versus large-cap companies, is at 92, one of the highest readings we have ever observed. Historically, readings at this level have preceded some of the most compelling return periods for patient investors in smaller companies.
The businesses in our portfolio are growing. The valuations are attractive. The derivatives overlay has demonstrated, in live market conditions, that it meaningfully limits downside. And our Trend Navigator signals that the period of maximum uncertainty may be giving way to one where clearer trends begin to emerge.
Gloom and doom make for compelling headlines. They also make for compelling entry points. For investors willing to look through the near-term noise and think in terms of a three to five year business cycle, FY27 may well look back on as one of the better entry points into quality small-cap equities in recent years.
Our message is simple: stay patient, stay disciplined, and invest with a manager who has the tools, both on the equity side and through systematic risk management, to navigate what comes next.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
